A more stable market will result with the emergence of REITs and professionally-managed, service-based property firms and asset-owning vehicles.

SINGAPORE'S real estate sector is transforming. A major impetus came from the 1997 East Asian financial crisis, which brought to the fore the risks of speculative property development and purchases.

During the financial crisis, non-core real estate assets became a drag on the performance of many corporations. The global recession in 2001 added to the urgency to improve asset productivity. More recently, questions were asked on whether Singaporeans were over-investing in real estate. The fundamental changes governing the use of Central Provident Fund (CPF) savings for housing will further stimulate changes in the Singapore real estate scene. In particular, the change in CPF rules to allow banks to have first charge on mortgage loans serviced by CPF savings may spur the growth of a mortgage securitisation market and open more avenues for investment in real estate mortgages. These developments, together with new investment products such as real estate investment trusts (REITs), will make property firms and investors rethink the way they approach real estate investment. Looking ahead, we should see a larger participation by both local and foreign institutional investors, greater stability in property values, more diversification and liquidity, and more certain return from a stronger emphasis on property yields in Singapore. Linking the Real Estate and Capital Markets Compared to Singapore, mature economies such as the US have more efficient real estate markets that are facilitated by their well-developed and dynamic capital markets. This is clearly seen in the real estate securitisation markets. In Singapore, real estate securitisation started to receive serious attention only recently. There were some earlier local attempts at real estate securitisation but they were relatively small and few in number. On the other hand, an estimated US$3 trillion of real estate mortgages and assets are securitised in the United States today, making the 40-year-old US real estate securitisation market an important component of the capital markets there. A broad range of innovative instruments - from mortgage-backed securities and REITs to derivative instruments - have evolved in this 40-year period. Real estate securitisation is an important instrument in the functioning of an efficient and mature real estate market. It provides a vehicle to convert traditional property assets that are illiquid and lack transparency into marketable securities. Real estate securitisation essentially involves putting assets into a pool and then issuing securities based on that pool, for sale to investors. (Figure 1 illustrates the securitisation process.) The development of the REIT market epitomises the development of real estate securitisation in the US. A REIT is a real estate company or trust that has satisfied certain tax requirements to become a pass-through entity that distributes substantially all its earnings to its unit holders. Created in 1960, US REITs today number about 300 and have assets totalling over US$300 billion in a wide range of property types including shopping centres, apartments, office buildings, warehouses, hotels and hospitals. Figure 2 traces the development of US REITs. A brief history of real estate securitisation in Singapore is also shown for comparison. Launch of the REIT Market in Singapore The launch of the CapitaMall Trust by CapitaLand in July 2002 marked the genesis of REITs in Singapore. As the real estate assets in REITs are divided into smaller standard tradeable units, REITs open up opportunities for small individual investors to own affordable shares of a large property or of a basket of properties. As an alternative investment product, REITs are relatively low-risk, high-yield and liquid in character. REITs allow individual and institutional investors to match their long-term cash-flow requirements with diversified risks. As the REIT market develops, there will also be opportunities for international property firms to launch REITs in the Singapore market to access regional and international capital. The REIT market in Singapore and Asia is still in the embryonic stage. There is potential for this market to grow significantly, given the high savings rates of Asians and their intrinsic interest in property investments as well as the under-representation of institutional funds in Asian real estate. Some studies have estimated that institutional funds worldwide totalled close to US$30 trillion. Only a tiny fraction of this, in the region of US$50 billion to US$100 billion, is invested in Asian real estate. A Property Investment Option for Retirement Funds REITs offer an alternative instrument for Singaporeans to invest their retirement funds. They can be expected to produce a steady stream of income as their distribution yields are based on rental income of the underlying real operating assets. In addition, investors will also partake in the growth of the value of the underlying assets. In the case of the CapitaMall Trust, the yield is projected to be above 7 per cent at the initial public offer price. This attractive yield (more than 300 basis points above risk-free instruments) comes from the rentals collected from the three shopping malls and will be distributed every six months free of tax deducted at source for qualifying Singapore tax residents. REITs are unlike equities, whose prices are more dependent on the volatility of the stock market and funds flowing in and out of the market. They are clearly an option for those who are keen on investing in property but are concerned with not having enough cash for retirement. We can imagine the three main uses of CPF savings - retirement expenditure, healthcare and property - as forming a 'triangle of forces' in equilibrium as we learned in physics (see Figure 3). A pull on one side will be at the expense of the other two. In other words, we can balance our savings in accordance with our needs, but the three elements will have to be adjusted in tandem. REITs, as a more liquid form of investment in property assets, should therefore appeal to those who want a steady income - an investment in property and yet the flexibility to redeploy their retirement funds any time. Greater Stability and More Emphasis on Yield Together with the growth of asset securitisation and inflow of institutional funds into Asian real estate will be a shift of emphasis to recurrent property yields. Asian real estate, including Singapore's, is still predominantly held by family-owned (or controlled) business corporations and individuals. Institutional investors have limited presence in Asian real estate. Unlike institutional investors, Asian landlords have traditionally relied on capital growth rather than rental income to drive their earnings. This focus on capital growth has contributed to a more speculative and volatile real estate market in Asia. Enlarging institutional participation in real estate will add depth to the market and promote stability. Capital appreciation going forward will also be more in line with economic growth. Many Asian corporations, including Singapore ones, have real estate assets on their balance sheets that are not part of their core businesses. As these corporations take steps to unlock the value of their real estate in a bid to strengthen their balance sheets, there will be opportunities to develop funds and other real estate-based financial products to attract international funds to Asian real estate. As mentioned earlier, the amount of funds out there is phenomenal. In tandem with this will be the growth of third-party professional property developer and manager of property funds and securitised assets, thus creating a new business model for the Asian real estate sector. Clearly, our real estate sector needs to do some catching up with the more developed markets. While property development for trading will remain a key component of the sector, the traditional model of an asset-heavy property developer-cum-owner will have to be refashioned. In its place will be professionally managed service-based property firms and asset-owning vehicles like property funds. Institutional investors will play a bigger role, and a more efficient and more stable market will emerge. Our real estate sector will slowly but surely be 'institutionalised'. In this way, as in the US, we could create more wealth from our real estate, which some may regard as 'buried capital'. The remaking of the Singapore real estate market has begun. Article by Mr Liew Mun Leong, President & CEO, CapitaLand. Published on 9 August 2002 in The Business Times Singapore)newspaper.